Revision Elasticity & it’s importance. What is Price elasticity? The responsiveness of one...
-
Upload
rachel-whitehead -
Category
Documents
-
view
216 -
download
0
Transcript of Revision Elasticity & it’s importance. What is Price elasticity? The responsiveness of one...
Revision
Elasticity & it’s importance
What is Price elasticity?
• The responsiveness of one variable to changes in another
• When price rises what happens to demand?
Demand fallsBUT!
How much does demand fall?
Elasticity – the concept
• If price rises by 10%, what happens to demand?
• We know demand will fall• By more than 10%?
or• By less than 10%?
• Elasticity measures the extent to which demand will change
21/04/23 4
PeD Mantra….
• If answer is between 0 and -1 • e.g. -0.4 or -0.8• The relationship is inelastic
• If the answer is between -1 and infinity
• e.g. -1.4 or 2 or 12.3 • The relationship is elastic
Consumers DO NOT
react much to a change in
price
Consumers DO react
To changes in prices
Consider a 10% increase
in price
Elastic or inelastic????
Would customers react lots (ELASTIC) or not much
(INELASTIC)….. With the following PeD’s????
Use your whiteboards
Elastic or inelastic?
-3
Elastic– because a 10% increase in price would lead to a 30% fall in demand
Elastic or inelastic?
-0.4
Inelastic– because a 10% increase in price would lead to a 4% fall in demand
Elastic or inelastic?
-0.1
Inelastic– because a 10% increase in price would lead to a 1% fall in demand
Elastic or inelastic?
-1.1
Elastic– because a 10% increase in price would lead to a 11% fall in demand
Elastic or inelastic?
-14
Elastic– because a 10% increase in price
would lead to a 140% fall in demand
What about the effect on revenue?
Using PeD to calculate changes in TR
• What if a company sells 10,000 units at £5.
• What is their current TR?
• TR = P x Quantity sold
• TR = £5 x 10,000 = £50,000
• What if the company has a PeD of -0.5?
• If they reduced their price – would the customers react a bit or loads?
• is -0.5 inelastic or elastic?
• INELASTIC….
Using PeD to calculate changes in TR
• What if a company sells 10,000 units at £5.
• What is their current TR?
• TR = P x Quantity sold
• TR = £5 x 10,000 = £50,000
• What if the company has a PeD of -0.5?
• …. and they reduce their price to £4.50
• What would happen to their TR now? Will it increase or decrease?
• 1st you need to know what the % increase in price has been….?
Using PeD to calculate changes in TR
• What if a company sells 10,000 units at £5.
• And now their price is £4.50
• What is the % change?
• Difference/original x 100 = % change
• 5 - 4.50 = 0.5 / 5 x 100 = -10%
• So if the company originally sold 10,000 units…..
• And PeD is 0.5
• And price has dropped by 10 %
• What will happen to DEMAND?
10% x 0.5 = 5%
So what’s 5% 0f 10,000 units?
500 units
But would that be a fall or an increase in sales?????
And the last step of the calculation…
• The original Q is what would happen to the company TR if they changed their price from £5 to £4.50, with original sales of 10,000?
Original TR
£5 x 10,000 = £50,000
And the last step of the calculation…
• The original Q is what would happen to the company TR if they changed their price from £5 to £4.50, with original sales of 10,000?
Original TR
£5 x 10,000 = £50,000
New sales
£4.50 x (10,000 + 500)= £4.50 x 10,500 = £47,250
So a price cut ….
Doesn’t guarantee higher profits!
What if they increased their price?
• Price was £5 but now £5.50?
• Price increase is 0.5/5 x 100 = +10%
• The company still has a PeD of -0.5
• So sales will FALL by 5%
• 10,000 x 5%• = 10,000 -500
• So £5.50 x 9,500
• TR = £52,250
• So an inelastic product will earn MORE REVENUE with a price rise!
Who needs a recap?
If not – get on with the worksheet
Worksheet Questions…
1. A company has a price cut from £10 to £8. What will be the impact on their revenue if they have a PeD of 0.8 and originally sold 30 units?
2. A company has a price cut from £20 to £14. What will be the impact on their revenue if they have a PeD of 2 and originally sold 100 units?
3. A company has a price rise from £15 to £16. What will be the impact on their revenue if they have a PeD of 2 and originally sold 100 units?
Worksheet Question 1• A company has a price cut from £10 to £8. What
will be the impact on their revenue if they have a PeD of 0.8 and originally sold 30 units?
• 10-8 = 2/10 x100 = 20% fall in price• 20% x 0.8 = 16% increase in sales• 16% of 30 = 4.8 units… can’t sell .8 of a good so
they must sell 5…
• Original TR = 10 x 30 = £300
• New TR = (30 +5) x £8 = £280
A price cut with an
inelastic good will reduce
your revenue
So a price rise with an
inelastic good will increase your revenue
Worksheet Question 2
• A company has a price cut from £20 to £14. What will be the impact on their revenue if they have a PeD of 2 and originally sold 100 units?
• 20-14 = 6/20 x100 = 30% fall in price• 30% x 2 = 60% increase in sales• 60% of 100 = 60 units
• Original TR = £20 x 100 = £2000
• New TR = £14 x (100+60) = £2240
A price cut with an
elastic good will increase
revenue
So a price rise with an elastic good will reduce
revenue
Worksheet Question 3• A company has a price rise from £15 to £16.
What will be the impact on their revenue if they have a PeD of 2 and originally sold 100 units?
• 15-16 = 1/15 x100 = 6.67% rise in price• 6.67% x 2 = 13.34% fall in sales• 13.34% of 100 = 13.34 units – but you can’t sell
0.34 of a product …so have to fall by 14 units
• Original TR = £15 x 100 = £1500
• New TR = ( £16 x (100 – 14) = £1376
A price rise with an elastic
good will reduce revenue
So a price cut with an elastic
good will increase revenue
How to make your product more inelastic
• …why???
…so customers don’t react to price increases!
• Make your product DIFFERENT to competitors – to keep them brand loyal.
• Take over the competition! So customers have to buy your products.
• Make price changes over a short period of time – so customers don’t notice!